The European Central Bank (ECB) stated in a recent report the need for clearer regulatory structures for stablecoins.
However, it remarked that in order to maximize those benefits, clear regulatory frameworks must be put in place.
Stablecoins help provide financial innovation and improve financial services
According to the ECB, the change in the financial landscape has led consumer preferences to shift and adapt to technological advancements.
The ECB said that traditional financial service providers have been seen to struggle in establishing a convenient, affordable, and quick payment service.
What stablecoins offer is a service that is appropriate for the changing financial landscape. They are also capable of filling the gap from traditional financing options.
According to the ECB, stablecoins can provide a “stable means of payment and a store of value.”
However, because some of them are backed by funds or crypto-assets, its value and stability may fluctuate depending on which asset the coin is pegged.
Another benefit that the ECB believes stablecoins will provide is an alternative payment service.
Stablecoins and the blockchain can help facilitate cross-border payments in a quick and affordable manner.
ECB: ‘New regulatory framework must be put in place to address risks’
The ECB took the Libra initiative as a case study for their report.
According to them, like many other stablecoins, Libra has the “potential to grow quickly” because of the ecosystem that Facebook and other Libra sponsors have built over time.
The ECB said that a problem might arise if the stablecoin gets to access a market on a global scale and begin to malfunction. The ECB cited that this could pose risks to the global financial system.
“A sudden realisation of these risks could trigger systemic consequences, the severity and impact of which would depend on the size and interconnectedness of the stablecoin arrangement in question. As the simulation in this article shows, a global stablecoin could, in certain circumstances, grow to such a size as to become systemically relevant.”
The ECB’s proposition is to ensure that “stablecoin arrangements do not operate in a regulatory vacuum.” Simply put, stablecoins should not be immune from regulation.
The risks that stablecoins pose to the global financial system must be adapted to by the promoters of stablecoins as well. The ECB said that the design of stablecoins in the future should comply with existing regulations.
The ECB adds:
“Alternatively, a new regulatory framework must be put in place to address risks and ensure that confidence in such arrangements can be sustained even in the presence of stress.”
While the ECB believes in the promise of stablecoins, they share the sentiment of the rest of the global community: Stablecoins should expect tight regulations if they ever wish to reach a global market.